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India says no to the supermarkets

There’s been a bit of a war going on in India’s retail sector recently. Under current rules, single-brand retailers can only be 51% owned by foreign companies and overseas supermarkets can’t operate at all. It means that international brands have to partner with local firms to open shops, and smaller, locally owned stores are protected from foreign competitors and their enormous economies of scale. It is of course anathema to free-trade advocates.

Because of these rules, supermarkets like Tesco or Walmart can sell wholesale, but cannot set up supermarkets catering to the public. It makes India the ‘last frontier‘ for the big supermarket chains, who are desperate to be able to flog their cheap goods to India’s fabled growing middle class.

In November, the government finally relented and changed the rules. Single-brand stores could now be 100% owned by overseas companies, and supermarkets could open on a 51% ownership basis. There was considerable opposition within parliament, and a matter of weeks later, the government shelved the new plans. So no supermarkets for India after all.

I don’t know enough about the Indian retail sector to say too much here. What I do know is that these kinds of trade policies are rare, bold, and far more valid than mainstream economics recognises. Most developed countries used protectionist measures when their own industries were in infancy, and only opened up their markets when they were sure that their homegrown industries were competitive. As writers like Erik Reinert and Ha-Joon Chang argue, free markets are something you mature into, not something you start out with.

I also know that supermarkets are a real mixed blessing. I’m sure they would provide consumer choice and cheaper prices for India’s shoppers, but they would be bad news for India’s farmers, who would see prices fall. It would also be bad news for anyone else working in retail, for street markets and local traders, who would never be able to compete on price. Allowing supermarkets might create jobs and growth, but it would slash plenty of other jobs in other places.

As I say, I can’t really comment on the wisdom of India’s decision and subsequent u-turn. But their decision to protect smaller local retailers rather than deregulate in favour of corporations is in stark contrast to our own government’s approach to the supermarkets.